Social investing won't bullet-proof your portfolio, but it can help(Read article summary)
When the markets are as choppy as they have been to start April, most stocks take a dive, even ones with social and environmental goals. But some areas of sustainable investing, as well as the long-term perspective of its investors, can help stabilize a portfolio.
When his financial adviser suggested sustainable investing, Greg Danford was skeptical. “I didn’t really want to be buying organic celery futures” or anything like that, recalls the Burlington, Vt., web designer. But he was open to alternatives – a short stint doing risk arbitrage in the 1980s had soured him on Wall Street – so he put a little money into a portfolio of socially screened stocks in 2004.
Four years later, the financial crisis hit, stocks lost half their value, and Mr. Danford, more fully invested in sustainable stocks and bonds, began to reap the benefits. His portfolio shrank less than the overall market and – the key thing – he stuck with his investments, which eventually recovered. When Wall Street hits a wave of volatility, as it did to kick off April, he looks on with curiosity but not fear. “I haven't looked at [the portfolio’s] performance for six months,” he says. “I have a portfolio for the next 25 years.”
Sustainable investing – sometimes known as sustainable, responsible, impact (SRI) investing – is no refuge from the raging storms that periodically roll through Wall Street. But it has a few advantages that can help portfolios weather those storms. It tends to attract and develop long-term investors who don’t panic at each plunge in the Dow. And it has certain investments that provide a more predictable return than the stock market, a key portfolio stabilizer when markets go haywire.
Take Equal Exchange, a cooperative based in West Bridgewater, Mass., that buys fair-trade coffee, chocolate, tea, and other agricultural goods from farmer co-ops in Africa, Asia, and the Americas. Its stock has a fixed price but has paid 5 percent annual dividends since 2000, the year of the dot-com crash. In two years, 2007 and 2013, it paid 6 percent.
“Although you don't make a killing, it’s 5 percent and has been since the beginning,” says Richard Moore, a sustainable design consultant to architects in Brookline, Mass., and an Equal Exchange investor. “It is very consistent.”
Another steady performer is Calvert Foundation. While housing prices were crashing during the Great Recession, “our affordable housing portfolio was performing really well,” says Justin Conway, the foundation’s vice president of investment partnerships. By funding affordable housing projects around the United States and other social ventures for the past 20 years, the foundation has paid 3 percent every year on its 10-year community investment notes.
Of course, the traditional investment world has similar steady offerings – certificates of deposit, bonds, etc. Stocks are a different story, whether they’re SRI or not.
“If you're invested in the public markets, you're getting whipsawed by the markets. It’s just that simple,” says Steve Schueth, president of First Affirmative Network, which supports SRI advisers around the US. “I don't think that we're a safe haven at all.”
For example: Socially responsible portfolios are just as likely as traditional portfolios to own established stocks like Alphabet (Google) and Johnson & Johnson. So when the stock market swooned in 2009, “the phone stopped ringing entirely,” recalls Gary Matthews, chief executive of SRI Investing, an investment adviser in New York City. Investors, including those involved in SRI, froze. “Then 2012 and 2013 were very good years for me. Clients were showing up left and right.”
Bouts of Wall Street volatility so far this year has not produced a similar reaction. “I'm not seeing any real movement,” says Matthew Patsky, chief executive officer of Trillium Asset Management, a Boston-based SRI investment adviser. “I'm not seeing it pick up. I'm not seeing it slow down.”
There are shreds of evidence that SRI stocks are a tad less volatile than traditional ones. Compared with traditional stock mutual funds, sustainable stock funds delivered equal or higher median returns with equal or lower median volatility for 64 percent of the periods examined between 2008 and 2014, according to a Morgan Stanley report. The Global Impact Investing Network found last year that private equity and venture capital impact funds – a subset of SRI not available to ordinary investors – appeared to be slightly less volatile than their traditional counterparts.
But more independent research is needed to establish these claims. “On net, I don't think we are yet in a position to say that SRI investments are less volatile than the market,” says Erika Karp, founder and CEO of Cornerstone Capital Group, a New York-based financial services firm specializing in sustainable investing. ‘You can say that SRI investments are often longer term. We still need better language, though. If we mean ‘sustainable, responsible, and impact’ by ‘SRI,’ then it is indeed constructive if capitalism is to reorient itself on behalf of society.”